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Healthy Enrollment Growth at Grand Canyon Education Inc Continues

Few sectors have earned the ire of the American public quite like for-profit education. After years of scandals and government crackdowns, many believe that the entire industry is headed for the dust bin.

Just don't tell that to Grand Canyon Education (NASDAQ: LOPE), a school that became for-profit only out of necessity in 2004 and has a real-life college campus in Arizona for nearly 20,000 students. The school reported earnings this week, showing healthy growth across the board.

This is especially important as the third quarter of any year represents the start of the school year, and is a harbinger of things to come for most for-profit schools.

Image source: Getty Images

Grand Canyon earnings: The raw numbers

Before diving into the details, here's how the company performed on the headline numbers.

Metric

Q3 2017

Q3 2016

Growth

Revenue

$236 million

$210 million

12%

Earnings per share

$0.81

$0.62

31%

Free cash flow

$109 million

$42 million

160%

Data source: Grand Canyon Education. All percentages rounded to nearest whole number.

The company spent a lot of money last year helping to build out its physical campus in Phoenix, and it reaped the rewards of having completed much of the work. That helps explain the enormous jump in free cash flow.

But that alone doesn't explain Grand Canyon's operating leverage. While instructional costs largely kept pace with revenue growth -- a good long-term sign that the school is committed to quality -- admissions and advertising growth came in below 10%, and general and administrative expenses actually shrank! Add it all together and operating expenses grew just 8%, versus the 12% revenue growth.

Digging deeper: Enrollment growth continues

But when it comes to for-profit education companies, there's no number more important than enrollment. Grand Canyon proved once again that it is attracting a healthy number of new students. Overall enrollment grew 11% to 91,320 students. Roughly 21% of those students attend the school's physical campus, while the rest are online learners.

Here's how that growth looks in context over the past year.

Data source: SEC filings

Online enrollment growth in particular surprised even management with its strength. All of these figures came in well above management's stated goal of long-term enrollment growth of 7.5% annually.

What else happened during the quarter?

While the company spent a lot of money building out its physical campus last year, CEO Brian Mueller said investors should be expecting more of the same:

This coming year will be a big building year, as we will add a major classroom building, two residence halls, a club sports facility and a new parking garage. We will also pick up additional property as we expand to 400 acres to eventually accommodate approximately 30,000 students.

The physical campus currently has 19,000 students. Management is clearly confident that number will continue to grow, and is adding more programs to attract students. STEM (science, technology, engineering, and math) fields are among the most popular right now, and the school is making large investments both in cybersecurity degrees and additive manufacturing.

But perhaps most interesting, the company's cash and investments balance has grown so much -- up 78% to $346 million -- that some analysts were asking if the company will go back to being a traditional non-profit private school.

Here's what Mueller had to say:

People are asking the question about whether we would go back and consider [non-profit status], and the answer is, yes. We have not made a decision to do that. But consider it? Yes, we would. And so, in case we would decide to more aggressively pursue a not-for-profit status and a for-profit public traded service company ... we want our cash balance to be as large as possible.

Mueller is referring to a somewhat unusual arrangement that it tried to pull off last year, but was turned down for. In the arrangement, the parent company would be a not-for-profit university that includes faculty and most campus buildings, while having a for-profit subsidiary that provides non-academic services for the school.

Investors should keep a close eye on this moving forward, as management seems to be indicating that a change in its status could be imminent. The college is waiting for updated rules from the Higher Learning Commission to see if such a change could be possible.

Looking ahead

Management upped its guidance on a few key metrics for the fourth quarter. Here's what that looks like.

Metric

Q4 Forecast

Implied Growth

Revenue

$268 million

9%

EPS

$1.09

8%

Enrollment

89,400

9%

Data source: Grand Canyon Education

While some may have been hoping for more earnings growth from the company, it's clear that building out the brand is management's No. 1 priority. And that involves additions to the school's physical campus, as well as new programs for e-learning graduate students.

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Brian Stoffel has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Grand Canyon Education. The Motley Fool has a disclosure policy.